Bond Funds, Bond ETFs, GICs and Guarantees

With record low rates, is there a place for GICs in your portfolio? Maybe if you are replacing a Bond Mutual Fund or even a Bond ETFs.

Management fees on bond mutual funds eat up most of the return of the investments. Even a low fee fund like PH&N Bond Fund has a MER of 0.6% which takes 23% of the portfolio's Yield to Maturity of 2.6% - you lose almost a quarter the the returns in fees! You can expect to put the remaining 2% in your pocket. With other high MER funds you could be losing half of the funds returns in fees.

With ETFs you are in the same boat - iShares Canadian Government Bond Index ETF (XGB) holdings have a Yield to Maturity of 2.28% and MER of 0.38% - you lose 17% - you put only 1.9% in your pocket. You can do better with a high yield savings account. Oaken Financial has a savings rate of 1.75% and Achieva Financial has a rate of 1.8%. GIC rates are even higher.UNLIKE BOND FUNDS AND ETFs, SAVINGS THE GIC PRINCIPAL AND RETURN IS GUARANTEED: Oaken deposits (through Home Trust Company) are insured through the Canada Deposit Insurance Corporation (CDIC). Every dollar deposited with Achieva is 100% guaranteed without limit by the Deposit Guarantee Corporation of Manitoba.

Oaken Financial continues to offer the best rates on GICs. A 5-year GIC rate is 2.8% which is greater than your net return on the bond fund or bond ETF yield after payer the MER. Here are today's rates: